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Thursday, October 31, 2013

Censof/GHL - Msia's GST collectors seek to dethrone cash (Star)

Malaysia's new consumption tax is a boon to IT companies that stand to win infrastructure contracts and fees – provided they can convince people to switch to electronic payments in a country where 91% of transactions are in cash.

The 6% goods and services tax (GST) that Prime Minister Najib Razak announced in his annual budget speech on Friday is aimed at narrowing a budget gap that is expected to hit 4% of gross domestic product this year.

Cash payments are harder for tax collectors to track, so the Government is encouraging e-payments as a way to reduce costs and improve efficiency.

For companies such as Censof Holdings Bhd and GHL Systems Bhd that specialise in creating electronic payment and software systems, the initial benefit will likely come well before the tax is implemented in April 2015.

These companies, along with privately held Brilliance Information Sdn Bhd and Revenue Harvest Sdn Bhd, are seen as front-runners for government contracts to build the necessary infrastructure because Malaysia has a procurement policy that favours local companies.

The government has not disclosed how much it will spend, but a similar project in Australia in 2000 cost A$4.5bil (US$4.31bil).

That potential has caught investors' attention. Censof's shares are up 64% year-to-date while GHL's have jumped more than 160%, both handily outstripping the broader market's 7.7% gain.

"To impose GST, you need to capture sales accurately and it needs to be done electronically. You need payment infrastructure in place," said Raj Lorenz, group CEO at GHL, Malaysia's largest e-payment firm by market share.

"The business is very bright but there are a lot of people using cash, so they (the government) have to make them all use e-payments. In the end, the only guys who can get away with it are those in the night markets," he said in an interview with Reuters.

Ameer Shaik Mydin, executive director with Censof, concurs, adding that all of his company's systems are GST-ready and waiting to be implemented on clients' sites.

"We've done it in Singapore and Australia," he told Reuters in an interview on Monday, referring to clients overseas. "It definitely has to be electronic. If not, I have to say it'll not work."

Malaysia's central bank has offered incentives to encourage electronic payments, which it thinks can generate annual economic savings equivalent to 1% of GDP. In May, it reduced the cost of inter-bank fees on e-payments to about US 3 cents from 63 cents, and increased cheque processing charges. It wants cash transactions to make up 63% of the total by 2020, down from 91% now.

E FOR EVERYTHING

Accounting for GST is especially tricky in a cash economy. Businesses might understate sales to lower the tax bill. But for cash-only companies, making the switch will be costly.

"Big boys can afford it, but what about eateries, sundry shops? Do you expect them to pay for such machine and issue receipts (on GST)?" asked John Yong, a business consultant based in Kuala Lumpur.

"If they don't buy and issue receipts, then the 6% GST is not going to be remitted to the government. Some industries are just not ready for GST," he added.

The finance ministry has recommended that only companies with annual sales above RM500,000 be subjected to GST, according to local media. That means 78% of total businesses – or 433,558 small and medium enterprises – would be exempted.

E-payment companies such as GHL and Censof currently get a fraction of the 50 sen per electronic transaction fee. The central bank expects the number of e-transactions to surge 10-fold to 12 billion by 2020. That would work out to about RM6bil a year in fees.

The e-payment industry is consolidating just as business appears to be picking up.

GHL, which counts banks and small businesses as clients, announced earlier this month it is taking over Australian listed peer e-pay Asia Ltd. Censof bought a controlling stake in rival Time Engineering Bhd last month. The next step for Malaysia is getting companies to file their taxes electronically. Yeo Eng Ping, who leads the Malaysia tax practice at accounting firm Ernst & Young, said the government was considering an e-filing system that would be compulsory for exporters and for businesses with annual turnover exceeding RM5mil. "E-filing allows for a much more efficient process of reporting, recording and ultimately collecting tax, not just indirect tax. This is especially so when teamed with e-payment," Yeo said – Reuters.